A tradeable bottom in Crude Oil

OPEC is trying to enforce quotas, but everyone is cheating. The US has massive shale oil drilling capacity. And the country is shifting towards natural gas and solar power. All this lines up for a glut in Crude oil supply, putting downward pressure on prices. And West Texas Intermediate (WTI) Crude has dropped from $55/barrel to $42/barrel, nearly 25%, since the beginning of the year.

But for any commodity the pricing equation is about supply and demand here and now. Prices may continue to move lower over time. But dynamics in place have shown that the price of Crude oil may be ready to bounce, if only for the short term. The chart below paints the picture.

It is easy to see the jagged trend lower since the start of March. But take note of two areas since then. First is the bottom at the end of March. Here it met rising resistance and stopped, reversed and climbed nearly back to the highs at the beginning of the year. At that low the RSI had dipped into oversold territory and the MACD has become extreme to the downside. Both also reversed.

The second is the low in early May. Here too the RSI dipped into oversold territory and the MACD hit that extreme low level. These two situations show how even in a downtrend there can be bounces, and they can be very big. Both ran more than 15% higher before falling back. And it may be happening again.

Last week WTI Crude hit another lower low on Wednesday. But since then it has found a bid and is moving back higher. The RSI which dipped into oversold territory is now rising and the MACD is turning back up from extreme levels toward a bullish cross. Will it rise over 15% again? Who knows. But using the bottom from last week as a stop it may well be worth trying a long position to find out if history repeats.

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